The Farm CPA

Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.

Based on a Trend APHof 187 bpa, the estimated premiums from 70% coverage to 85% coverage are as follows:

70% - $3.65

75% - $6.12

80% - $12.47

85% - $24.41

This results in a guaranteed revenue base of $602 at 70% rising by $43 for each 5% increase to a final number of $731. The premium increase from 70% to 75% is only $2.47 whereas the increase from 80% to 85% is almost a full $10. On the face of it, the 85% coverage level seems to be much more expensive. However, you must determine the expected probability of having claim at each coverage level. For example, at the 85% coverage level, you might expect a full claim (from the 80% to 85% level) approximately 55-65% of the time. At the 70% level, your expectation for a claim might drop to only 10-20% of the time.

Therefore, you must run your numbers to determine your expected claim amount and then divide that by the marginal amount of extra premium to arrive at your expected return. When you perform these calculations, you may find that the 85% coverage level costs about the same as the 75% or less coverage. Also, for 2014 if prices stay low, it is even more important that farmers truly lock in their cash input costs. This may lead you to getting the highest coverage possible and if prices rally back to the $5.65 range, you may even get a bonus.

Every farmer's situation is different, but the key is that you cannot just look at the difference in premium, you must determine your "expected" yield versus the extra cost.